Tobacco Settlement Authority of the State of Washington
Washington Tobacco Settlement Authority Loses 2004 NPM Adjustment Arbitration
Thu 10/21/2021 15:01 PM
Relevant Documents:
EMMA Notice (Oct. 19)
EMMA Audit (November 2020)
EMMA Notice (November 2020)
Annual TSA Payments (NAAG)
Issuer Homepage
The state of Washington could lose tobacco settlement revenue in 2022 and beyond as a result of an adverse arbitration ruling disclosed on EMMA this week, said market sources. The Washington Tobacco Settlement Authority, or TSA, had $99 million in tobacco settlement revenue bonds with $40 million maturing over the next two years - including $14.6 million 5% Series 2013 tobacco bonds coming due next June, according to market sources.
TSA bondholders had $35.7 million in a restricted bond fund as of June 30, 2020, according to the TSA’s most recent audited financial statements, which is enough to pay for debt service on the Series 2013 and Series 2018 revenue bonds next year, said the market sources. In fiscal 2020, the TSA paid $7.7 million in interest expense and $28 million in total redemptions, which included an optional redemption of $14 million, according to a supplemental November 2020 EMMA notice. The liquidity reserve is enough to cover debt service requirements in 2022, said the sources. But there is uncertainty about 2023 regarding tobacco settlement revenue for the state to pay debt service on the TSA bonds, according to market sources.
The loss of tobacco settlement revenue stems from a long-running dispute between a handful of states and the participating manufacturers, or PMs, that took part in the 1998 master settlement agreement, or MSA. The MSA settled multiple lawsuits between the PMs and 48 state attorneys general over the harms to health and financial burdens associated with smoking.
As part of the MSA, states were required to “diligently enforce” the MSA provisions on tobacco manufacturers that did not participate in the MSA - for example, the collection of excise taxes. These non-participating manufacturers are referred to as NPMs. The logic for the requirement is that failure to diligently enforce the MSA meant a loss in market share for the PMs because the NPMs would have cheaper products. Therefore, the PMs could reduce their payments to the states through an “NPM adjustment.”
The NPM adjustment for 2004 was $1.14 billion, which was held in escrow as states arbitrated with the PMs over the question of their diligent enforcement. The state of Washington lost its arbitration but had already received $129.1 million from the PMs in 2004, which was its 2% pro rata share of the total $6.2 billion in 2004 MSA payments, according to the National Association of Attorneys General, or NAAG. Because the 2004 amount was already paid to Washington, the PMs have a credit against future payments.
Washington has received $3.1 billion since payments began in 1999, and in 2020 alone it received $124.9 million, according to NAAG. It sent $34 million to the TSA trustee in 2020, according to its fiscal 2020 audit. Although a liquidity reserve will provide bondholders with payment in 2022, the key question is whether Washington is responsible for the total $1.14 billion NPM adjustment, said the market sources. In that case, it might be years before the state of Washington and the TSA receive any revenue from MSA payments, which are annually disbursed in April.
It is unlikely, though, that Washington will be held accountable for the entire $1.14 billion, said the market sources. While the initial determination from the arbitration panel points toward a failure to diligently enforce the MSA, it does not mean that Washington is responsible for the total $1.14 billion in lost market share in 2004, said the sources.
--Seth Brumby
EMMA Notice (Oct. 19)
EMMA Audit (November 2020)
EMMA Notice (November 2020)
Annual TSA Payments (NAAG)
Issuer Homepage
The state of Washington could lose tobacco settlement revenue in 2022 and beyond as a result of an adverse arbitration ruling disclosed on EMMA this week, said market sources. The Washington Tobacco Settlement Authority, or TSA, had $99 million in tobacco settlement revenue bonds with $40 million maturing over the next two years - including $14.6 million 5% Series 2013 tobacco bonds coming due next June, according to market sources.
TSA bondholders had $35.7 million in a restricted bond fund as of June 30, 2020, according to the TSA’s most recent audited financial statements, which is enough to pay for debt service on the Series 2013 and Series 2018 revenue bonds next year, said the market sources. In fiscal 2020, the TSA paid $7.7 million in interest expense and $28 million in total redemptions, which included an optional redemption of $14 million, according to a supplemental November 2020 EMMA notice. The liquidity reserve is enough to cover debt service requirements in 2022, said the sources. But there is uncertainty about 2023 regarding tobacco settlement revenue for the state to pay debt service on the TSA bonds, according to market sources.
The loss of tobacco settlement revenue stems from a long-running dispute between a handful of states and the participating manufacturers, or PMs, that took part in the 1998 master settlement agreement, or MSA. The MSA settled multiple lawsuits between the PMs and 48 state attorneys general over the harms to health and financial burdens associated with smoking.
As part of the MSA, states were required to “diligently enforce” the MSA provisions on tobacco manufacturers that did not participate in the MSA - for example, the collection of excise taxes. These non-participating manufacturers are referred to as NPMs. The logic for the requirement is that failure to diligently enforce the MSA meant a loss in market share for the PMs because the NPMs would have cheaper products. Therefore, the PMs could reduce their payments to the states through an “NPM adjustment.”
The NPM adjustment for 2004 was $1.14 billion, which was held in escrow as states arbitrated with the PMs over the question of their diligent enforcement. The state of Washington lost its arbitration but had already received $129.1 million from the PMs in 2004, which was its 2% pro rata share of the total $6.2 billion in 2004 MSA payments, according to the National Association of Attorneys General, or NAAG. Because the 2004 amount was already paid to Washington, the PMs have a credit against future payments.
Washington has received $3.1 billion since payments began in 1999, and in 2020 alone it received $124.9 million, according to NAAG. It sent $34 million to the TSA trustee in 2020, according to its fiscal 2020 audit. Although a liquidity reserve will provide bondholders with payment in 2022, the key question is whether Washington is responsible for the total $1.14 billion NPM adjustment, said the market sources. In that case, it might be years before the state of Washington and the TSA receive any revenue from MSA payments, which are annually disbursed in April.
It is unlikely, though, that Washington will be held accountable for the entire $1.14 billion, said the market sources. While the initial determination from the arbitration panel points toward a failure to diligently enforce the MSA, it does not mean that Washington is responsible for the total $1.14 billion in lost market share in 2004, said the sources.
--Seth Brumby
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.